Which of the following would not be considered an inherent limitation of the potential effectiveness of an entity's internal control structure?
Actions, policies, and procedures that reflect the overall attitude of management, directors, and owners of the entity about internal control relate to which of the following internal control components?
Vendor account reconciliations are performed by three clerks in the accounts payable department on Friday of each week. The accounts payable supervisor reviews the completed reconciliations the following Monday to ensure they have been completed. The work performed by the supervisor is an example of which COSO component?
Which of the following is an advantage of a computer-based system for transaction processing over a manual system? A computer-based system
will be more efficient in generating financial statements.
Which of the following is an example of an application control?
The sales system automatically computes the total sale amount and posts the total to the sales journal master file.
Which of the following is generally not considered a category of IT general controls?
Controls that determine whether a vendor number matches the pre-approved vendors in the vendor master file
Which of the following correctly describes an internal control component?
Monitoring relates to ongoing assessment by management to determine whether controls are operating as intended.
Which of the following situations is not an example of an inherent limitation of internal control?
A lack of physical controls over the safeguarding of assets allows an employee to steal company assets.
Which of the following factors are included in an entity's control environment?
Participation of Those Charged With Governance : YES
Integrity and Ethical Values : YES
Organizational
Structure: YES
Which of the following is an example of an operation deficiency in internal control?
Clerks who conduct monthly reconciliation of intercompany accounts do not understand the nature of misstatements that could occur in those accounts.
A material weakness in internal control represents a control deficiency that
results in a reasonable possibility that internal control will not prevent or detect material financial statement misstatements.
An auditor of a large public company identifies a material weakness in internal control. The auditor
must issue an adverse opinion on internal control over financial reporting.
The auditor's tests of controls revealed that required approvals of cash disbursements were absent for a large number of sample transactions examined. Which of the following is least likely to be the appropriate auditor response?
The auditor will increase the planned detection risk.
An auditor uses assessed control risk to
determine the acceptable level of detection risk for financial statement assertions.
On the basis of audit evidence gathered and evaluated, an auditor decides to increase assessed control risk from that originally planned. To achieve an audit risk level (AcAR) that is substantially the same as the planned audit risk level (AAR), the auditor will
decrease planned detection risk.
As general IT controls weaken, the auditor is most likely to
expand testing of automated application controls used to reduce control risk to cover greater portions of the fiscal year under audit.
Before processing, the system validates the sequence of items to identify any breaks in sequence of input documents. This automated control is primarily designed to ensure the
An auditor will use the test data approach to obtain certain assurances with respect to the
procedures contained within the program.
During the planning stage of an audit, the auditor initially assessed both inherent risk and control risk at a high level. Further testing of the client's internal controls led the auditor to reduce the assessment of control risk. Which of the following will most likely occur as a result?
The auditor may reduce the amount of substantive procedures performed.
In which of the following scenarios would an auditor most likely increase tests of controls?
When the client's IT system is extensively integrated throughout the company's accounting system
Jefferson, CPA, has identified five significant deficiencies in internal control during the audit of Portico Industries, a nonpublic company. Two of these conditions are considered to be material weaknesses. Which best describes Jefferson's communication requirements?
Communicate all five significant deficiencies to Portico's management and those charged with governance, distinguishing between material weaknesses and significant deficiencies.
An auditor's decision either to apply analytical procedures as substantive tests or to perform substantive tests of transactions and account balances usually is determined by the
relative effectiveness and efficiency of the tests.
The auditor faces a risk that the audit will not detect material misstatements that occur in the accounting process. To minimize this risk, the auditor relies primarily on
A conceptually logical approach to the auditor's evaluation of internal control consists of the following four steps: I. Determining the internal controls that should prevent or detect errors and fraud. II. Identifying control deficiencies to determine their effect on the nature, timing, or extent of auditing procedures to be applied and suggestions to be made to the client. III. Determining whether the necessary internal control procedures are prescribed and are being followed satisfactorily. IV. Considering the types of errors and fraud that can occur. What should be the order in which these four steps are performed?
To support the auditor's initial assessment of control risk below maximum, the auditor performs procedures to determine that internal controls are operating effectively. Which of the following audit procedures is the auditor performing?
The primary objective of performing tests of controls is to obtain
a reasonable degree of assurance that the client's internal controls are operating effectively on a consistent basis throughout the year.
Tests of controls are most likely to be omitted when
the understanding of internal control indicates that evaluating the effectiveness of control policies and procedures is likely to be inefficient.
In the financial statement audit of a nonpublic company, the auditor decides to perform tests of the controls related to the occurrence of sales transactions. Which of the following best explains why the auditor decided to test these controls?
Control risk is assessed at below the maximum.
Substantive analytical procedures are most likely to be used to test which of the following accounts?
Which of the following is the auditor least likely to consider when developing the overall audit strategy?
Evaluation of accounts receivable confirmations
The accounting system will not post a sales transaction to the sales journal
without a valid bill of lading number. This control is most relevant to which transaction-related objective for sales?
The accounting system automatically obtains the unit price based on scans of bar codes for merchandise sold. This control is most relevant to which transaction-related objective for sales?
Which of the following controls would be most effective in detecting a failure to record cash received from customers paying on their accounts?
Monthly statements are sent to customers and any discrepancies are resolved by someone independent of cash handling and accounting.
Which of the following controls most likely will be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?
Employees involved in the credit-granting function are separated from the sales function.
A sales invoice for $5,200 was computed correctly but, by mistake, was entered as $2,500 to the sales journal and posted to the accounts receivable master file. The customer remitted only $2,500, the amount on his monthly statement.
Prelistings and predetermined totals are used to control postings.
Shipments occurring in December 2016 did not get recorded until the first few days of January 2017.
As goods leave the shipping dock, the system generates a bill of lading and associated sales invoice, which is automatically recorded in the sales journal
An auditor is performing substantive tests of transactions for sales. One step is to trace a sample of debit entries from the accounts receivable master file back to the supporting duplicate sales invoices. What will the auditor intend to establish by this step?
Debit entries in the accounts receivable master file are correctly supported by sales invoices.
Which audit procedure is most effective in testing credit sales for overstatement?
Vouch a sample of recorded sales from the sales journal to shipping documents.
To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor would most likely select a sample of transactions from the population represented by the
Tracing shipping documents to sales invoices provides evidence that
shipments to customers were properly invoiced.
Which of the following procedures most likely represents an internal control designed to reduce the risk of errors in the billing process?
Comparing control totals for shipping documents with corresponding totals for sales invoices.
An auditor wishes to test the completeness assertion for sales. Which of the following audit tests would most likely accomplish this objective?
Select a sample of shipments occurring during the year and trace each one to inclusion in the sales journal.
As a result of analytical procedures, the auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should
consider the possibility of a misstatement in the financial statements.
An auditor's preliminary analysis of accounts receivable turnover revealed the following rates over these account periods:
2016/4.3 2015/6.2 2014/7.3
Liberalization of credit policy
After a CPA has determined that accounts receivable have increased as a result of slow collections in a "tight money" environment, the CPA will be likely to
expand tests of collectibility.
Which of the following procedures will an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?
Inspect the shipping records documenting the merchandise sold to the debtors.
The negative form of accounts receivable confirmation request is useful except when
individual account balances are relatively large.
The return of a positive confirmation of accounts receivable without an exception attests to the
accuracy of the receivable balance.
Which of the following will most likely provide the most assurance concerning the accuracy balance-related objective for accounts receivable?
Vouch amounts in the subsidiary ledger to details on shipping documents.
Which of the following audit procedures will best uncover an understatement of sales and accounts receivable?
Test a sample of sales transactions, selecting the sample from prenumbered shipping documents.
The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because
customers may not be inclined to report understatement errors in their accounts.
Which of the following is least likely to be a reasonable explanation for an increase in accounts receivable turnover?
Allowance of a new grace period for customer payments
An auditor who is auditing accounts receivable would least likely perform which of the following tests?
Select cash disbursements made shortly after year-end and examine the supporting documentation such as receiving reports and vendor invoices.
The auditor sends out positive accounts receivable confirmations for a client. Assuming a second confirmation is sent out to a major customer who still fails to respond, the auditor should:
Send out a third confirmation request and if no response, perform alternative procedures.
A CPA obtains a January 10 cutoff bank statement for a client directly from the bank. Very few of the outstanding checks listed on the client's December 31 bank reconciliation cleared during the cutoff period. A probable cause for this is that the client
transmitted the checks to the payees after year-end.
In establishing the existence and ownership of an investment held by a corporation in the form of publicly traded stock, an auditor should inspect the securities or
confirm the number of shares owned that are held by an independent custodian.
The auditor should ordinarily send confirmation requests to all banks with which the client has conducted any business during the year, regardless of the year-end balance, because
the confirmation form also seeks information about indebtedness to the bank.
The auditor should control and verify all liquid assets simultaneously to prevent
conversion of assets to conceal a shortage.
Which of the following is one of the better auditing techniques to detect kiting?
Prepare a schedule of bank transfers from the client's books.
Which of the following cash transfers results in a misstatement of cash at December 31, 2016?
Recorded in books: 1/4/2017
Paid by Bank: 1/5/2017
Recorded in books: 12/31/2017
Received by bank: 1/4/2017
Which of the following controls would most likely detect a kiting scheme?
Preparing a bank transfer schedule
All of the following are effective ways to prevent and/or detect lapping, except for
preparing a bank transfer schedule
Which of the following discovered by the auditor would be a weakness in the client's internal control over its investments?
Investments not held by an independent third-party custodian are kept in the Treasurer's office.
Which of the following is an internal control that will prevent paid cash disbursement documents from being presented for payment a second time?
The official signing the check compares the check with the documents and should deface the documents.
Which of the following questions would be best to include in an internal control questionnaire concerning the completeness assertion for purchases?
Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?
The authority to accept incoming goods in receiving should be based on a(n)
In auditing accounts payable, an auditor's procedures most likely will focus primarily on management's assertion of
Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period
An auditor traced a sample of purchase orders and the related receiving reports to the acquisitions journal and cash disbursements journal. The purpose of this substantive test of transactions most likely was to
determine that purchases were properly recorded.
When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate
population most likely is
vendors with whom the entity has previously done business.
In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support?
Which of the following tests would an auditor be least likely to perform during an audit of accounts payable?
Send out accounts payable confirmations.
While auditing a client's purchase transactions, an auditor selects a sample of vouchers and then compares the dates on the vouchers to the dates on which the corresponding transactions were actually recorded in the client's purchase journal. The audit procedure is most likely designed to test the
Which of the following controls will most likely justify a reduced assessed level of control risk for the existence assertion for equipment?
Internal auditors periodically select equipment items in the fixed assets master file and locate the related equipment on company premises.
Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control that provides for
investigations of variances within a formal budgeting system.
Which of the following questions is an auditor least likely to include on an internal control questionnaire concerning the initiation and execution of equipment transactions?
Are procedures in place to monitor and properly restrict access to equipment?
In testing for unrecorded disposals of equipment, an auditor most likely will
select items of equipment from the accounting records and then locate them during the plant tour.
Which of the following analytical procedure results might suggest that certain repairs and maintenance expenses have been inappropriately capitalized?
The balance in the repairs and maintenance expense account is noticeably lower than amounts recorded in the past several years.
In connection with the audit of the prepaid insurance account, which of the following procedures is usually not performed by the auditor?
Confirm premium rates with an independent insurance broker.
The auditor may note that annual depreciation expense is too low for a class of assets by noting
excessive recurring losses on assets retired.
An auditor's principal objective in analyzing repairs and maintenance expense accounts is to
discover expenditures that were expensed but should have been capitalized.
Which of the following comparisons will be most useful to an auditor in auditing an entity's income and expense accounts?
Current year revenue to budgeted current year revenue
An audit firm performs a preliminary review of the client's internal controls over its property, plant, and equipment cycle. Which of the following would represent a weakness in internal control?
The purchasing department generates a special requisition form upon oral or written approval by senior management.
In searching for unrecorded retirements, an auditor selects older fixed assets from the subsidiary ledger and then tries to locate those assets. This procedure primarily relates to management's assertion of
When auditing a client's property, plant, and equipment transactions, which of the following tests of details can be used to support the existence and occurrence assertion?
Vouch a sample of purchases to the vendor invoice and receiving report.
Control risk is the risk that a material misstatement in an account will not be prevented or detected on a timely basis by the client's internal controls. The best control to prevent or detect fictitious payroll transactions is to
restrict authorization for hiring, terminating, or changing pay rate or job status to the human resources function.
A factory supervisor at Steblecki Corporation discharged an hourly worker but did not notify the human resources department. The supervisor then forged the worker's signature on time cards and work tickets and, when giving out the checks, diverted the payroll checks drawn from the discharged worker to his own use. The most effective procedure for preventing this activity is to
have a paymaster who has no other payroll responsibility distribute the payroll checks.
An auditor found that employee time records in one department are not properly approved by the supervisor. Which of the following could result?
Employees might be paid for hours they did not work.
A common audit procedure in the audit of payroll transactions involves tracing selected items from the payroll journal to employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of the audit proposition that
all employees worked the number of hours for which their pay was computed.
In performing tests concerning the granting of stock options, an auditor should
trace the authorization for the transaction to a vote of the board of directors.
An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing to
identify potential liabilities for unpaid payroll taxes.
In auditing the payroll function of a client, an auditor would least likely
request specific management representations related to payroll.
An auditor most likely would introduce test data into a computerized payroll system to test internal controls related to the
discovery of invalid employee I.D. numbers.
An auditor is performing a preliminary assessment of a large client's internal controls over payroll. The auditor would identify which of the following as an
improper segregation of duties related to the payroll functions?
All blank checks and the check signature plate are maintained by human resources.
For control purposes, the quantities of materials ordered may be omitted from the copy of the purchase order that is
forwarded to the receiving department.
For control purposes, the quantities of materials ordered may be omitted from the copy of the purchase order that is
forwarded to the receiving department.
Which of the following internal control procedures most likely would be used to maintain accurate inventory records?
Periodic inventory counts are used to adjust the perpetual inventory records.
Which of the following sets of duties related to inventory and warehousing causes the greatest concern about inadequate segregation of duties?
Purchasing agents who arrange for shipment of raw materials from vendors are responsible for verifying actual receipt of the inventory items at the receiving dock.
An auditor selected items for test counts while observing a client's physical inventory. The auditor traced the test counts to the client's inventory listing. This procedure likely obtained evidence about which balance-related audit objective for inventory?
Which of the following procedures is the auditor least likely to perform on the actual date the physical inventory count is observed?
Examine documentation supporting the acquisition of highly material inventory items on hand at the count date.
An inventory turnover analysis is useful to the auditor because it may detect
the existence of obsolete merchandise.
As part of the current audit, the auditor begins performing substantive tests on a client's inventory. To test the valuation, allocation, and accuracy assertion, the auditor should perform all of the following procedures except for
vouching a sample of items from the client's inventory report sheet to the corresponding prenumbered inventory tags.
In auditing a manufacturing entity, which of the following procedures would an auditor most likely perform to determine whether slow-moving, defective, and obsolete items included in inventory are properly identified?
Tour the manufacturing plant or production facility
Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate controls over the invoicing function allow goods to be shipped that are not invoiced. The inadequate controls could cause anTerm
understatement of revenues and receivables, and an overstatement of inventory
Which of the following controls will most likely justify a reduced assessed level of control risk for the completeness assertion for notes payable?
The accounting staff reviews board of director minutes for any indication of any transactions involving outstanding debt to make sure all borrowings are included in the general ledger.
When an auditor observes that the recorded interest expense seems to be excessive in relation to the balance in the bonds payable account, the auditor might suspect that
bonds payable are understated.
In the audit of notes payable, which balance-related audit objective is generally one of the most important for the auditor to verify?
Existing notes payable are included on the balance sheet as of year end.
During an audit of a publicly held company, the auditor should obtain written confirmation regarding debenture transactions from the
Which of the following internal controls is least likely to reduce risks related to the occurrence transaction-related audit objective for issuances of stock?
The board of directors must approve the distribution of cash dividends.
Which of the following audit
procedures would be most relevant when examining the completeness transaction-related audit objective for capital stock?
The auditor examines minutes of the board of directors' meetings to identify any actions involving the issuance of capital stock.
An auditor is planning the test of details for a client's debt transactions. In order to test the existence and occurrence assertion, the auditor would most likely perform which of the following tests?
Review the board minutes to obtain evidence of new agreements and then follow up by inspecting the new agreements
In order to test the valuation assertion related to the client's stockholders' equity transactions, the auditor may complete which of the following substantive procedures?
Analyze the client's retained earnings account by reviewing the propriety of the direct entries to the retained earnings account, starting with the date of the previous audit
An auditor is in the process of performing substantive procedures on a client's stockholders' equity and vouches stock-related transactions recorded during the year to board minutes. Which of the following assertions is the auditor testing with these procedures?
When a contingency is resolved subsequent to the issuance of audited financial statements, which correctly contained disclosure of the contingency in the footnotes based on information available at the date of issuance, the auditor should
take no action regarding the event.
Which of the following would be least likely to be included in a standard inquiry to the client's attorney?
A request for the attorney to opine on the correct accounting treatment associated with an outstanding claim or pending lawsuit outcome
An audit report was dual-dated for a subsequent event disclosed in the financial statements, which occurred after the completion of the evidence collection process but before the issuance of the financial statements. The auditor's responsibility for events occurring subsequent to the completion of the evidence collection process was
limited to the specific events referred to.
An example of an event occurring in the period between the end of the year being audited and the date of the auditor's report that normally will not require disclosure in the financial statements or auditor's report is
decreased sales volume resulting from a general business recession.
Which of the following is not a required item to be communicated by the auditor to the audit committee or others charged with governance?
Recommendations for improving the client's business.
Written management representations obtained by the auditor in connection with a financial statement audit should include a
statement of management's belief that the effects of uncorrected misstatements are not material.
contains recommendations from the auditor designed to help the client improve the efficiency and effectiveness of its business.
The Form 10-K filed by management of a public company includes a section on management's discussion and analysis (MD&A) in addition to the annual financial statements. Which of the following best describes the auditor's responsibility for the MD&A information?
The auditor must read the MD&A information to determine if there is any material inconsistency with the audited financial statements.
Management of Thurman Corporation included additional supplementary information in documents that include the audited financial statements for the year ended December 31, 20162016. Management has asked its audit firm, Wally, CPAs, whether they can report on the supplementary information. Which of the following conditions would preclude Wally, CPAs from conducting this engagement?
The supplementary information covers the period January 1, 2016, through February 15, 2017.
Investment and property schedules are presented for purposes of additional analysis in a document outside the basic financial statements. The schedules are not required supplementary information. When the auditor is engaged to report on whether the supplementary information is fairly stated in relation to the audited financial statements as a whole, the measurement of materiality is the
same as that used in forming an opinion on the basic financial statements as a whole